Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Congressional research reportSep 22, 2009

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Department of Defense Fuel Spending,

Supply, Acquisition, and Policy

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Specialist in Energy and Energy Infrastructure Policy

September 22, 2009

Congressional Research Service

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www.crs.gov

R40459

CRS Report for Congress

Prepared for Members and Committees of Congress

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Summary

Department of Defense (DOD) fuel consumption varies from year to year in response to changes

in mission and the tempo of operations. DOD may consume upwards of 1% of the petroleum

products refined in the United States annually. Petroleum products purchased and consumed

overseas may double DOD’s consumption. The majority of DOD’s bulk fuel purchases are for jet

fuel, which has ranged as high as 101 million barrels annually in the past decade. The U.S.

refining industry has been supplying 50% of the jet fuel demand. DOD has consumed as much as

145 million barrels in overall petroleum products annually.

In FY2000, fuel costs represented 1.2% of the total DOD spending, but by FY2008 fuel costs had

risen to 3.0%. Over the same time, total defense spending had more than doubled, but fuel costs

increased nearly 500%. Prices paid for military specification JP-8 and JP-5 jet fuel have exceeded

the price of commercial equivalent fuel. In a recent move to contain fuel costs, DOD has begun

substituting commercial grade jet fuel for some of its purchases, and upgraded the fuel to

military-specification.

Currently, 141 refineries operate in the United States. DOD’s top four fuel suppliers operate a

combined 31 refineries in the United States, which represents nearly 6 million barrels per day of

crude oil distillation capacity. A typical U.S. refinery yields a limited supply of jet and diesel fuel

depending on the type of crude oil processed. Gulf Coast (Texas and Louisiana) refineries yield

up to 8% jet fuel. Generally, refineries are set up to run specific grades of crude oil, for example

light sweet crude or heavy sour crude. Light sweet crude is particularly desirable as a feedstock

for gasoline refining because its lighter-weight hydrocarbons make it easier to refine. Heavier

crude oils require more complex processing than light crudes, and sour crudes require

desulfurization. Changing crude oil supplies have consequently forced refineries to upgrade their

processes (thus increase refinery complexity) to handle heavier sour crude oils. At the same time,

the Environmental Protection Agency (EPA) has taken action to require lower sulfur content of

diesel fuel, and has proposed a final rule that will require refineries to report their greenhouse gas

emissions as a prelude to expected legislation that will limits emissions.

The Defense Energy Support Center (DESC), which falls under the Defense Logistics Agency,

has the mission of purchasing fuel for all of DOD’s services and agencies. In practice, DESC has

typically awarded fuel contracts for lengths of one year, but there are other buying programs with

longer contract periods. DESC uses fixed-price contracts with economic price adjustments. These

adjustments provide for upward and downward revision of the stated contract price upon the

occurrence of specified contingencies. DESC has determined that supplies and related services

are eligible for the multi-year contracting provisions under the Federal Acquisition Regulation,

and has adopted contracting instructions for entering into multiyear contracts. Bulk petroleum

contracts and direct delivery fuel contracts are likely to remain one-year contracts, however.

DESC bases contract delivery price on the lowest cost to the government; however, the hidden

logistical cost born by operational commands moving the fuel to their area of operations may not

be fully accounted. The acquisition process for new military capabilities now requires that DOD

account for fuel logistics when evaluating lifecycle costs.

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Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Contents

Background ...................................................................................................................................... 1

Fuel Purchases ................................................................................................................................. 2

DOD Fuel Cost vs. Commercial Fuel Price .............................................................................. 3

DESC Fuel Cost vs. DOD Outlays ............................................................................................ 5

Refining, Suppliers, and the Crude Oil Supply................................................................................ 6

Crude Oil Supply ....................................................................................................................... 6

Refining ..................................................................................................................................... 7

Sulfur Regulations ..................................................................................................................... 9

Greenhouse Gas Regulations ................................................................................................... 10

U.S. Refiners Supplying DOD Fuel ........................................................................................ 10

Refinery Jet Fuel Yield and Supply ......................................................................................... 13

Fuel Acquisition ............................................................................................................................. 14

Acquisition Regulations .......................................................................................................... 15

Multiyear Contracting Authority ............................................................................................. 15

Acquisition of Alternative Fuels .............................................................................................. 16

Fully Burdened Cost of Fuel ................................................................................................... 17

Policy Considerations .................................................................................................................... 17

For Further Reading ....................................................................................................................... 20

Figures

Figure 1. Average Cost of All DESC Purchased Petroleum Products ............................................. 3

Figure 2. DOD Fuel Costs vs. Commercial and Crude Oil Price .................................................... 4

Figure 3. Crude Oil Supply 2007 ..................................................................................................... 6

Figure 4. Petroleum Products Boiling Range .................................................................................. 7

Figure 5. Yields of Typical Gulf Coast Refineries ........................................................................... 9

Tables

Table 1. DESC Fuel Product Purchased by Category ...................................................................... 2

Table 2. DOD Fuels Costs vs. Crude Oil Costs ............................................................................... 4

Table 3. DESC Fuel Costs vs. DOD Budget Authority and Outlay ................................................. 5

Table 4. Crude Oil Assays................................................................................................................ 7

Table 5. Top U.S. Fuel Suppliers to DOD FY2003 - FY2008 ....................................................... 11

Table 6. U.S. Refineries Operated by Top Suppliers ..................................................................... 12

Table 7. Military Use vs. Commercial Use Jet Fuel, and Total U.S. Refined Products ................. 13

Table 8. U.S. Refined Military Jet Fuel Percentage of U.S. Refined Jet Fuel and All U.S.

Refined Products......................................................................................................................... 13

Table 9. U.S. Refined Military Jet Fuel Vs. DESC Jet Fuel Purchases ......................................... 14

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Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Appendixes

Appendix. Terms ............................................................................................................................ 21

Contacts

Author Contact Information........................................................................................................... 23

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Background

Department of Defense (DOD) fuel consumption varies from year to year in response to changes

in mission and the tempo of operations. DOD may consume upwards of 1% of the petroleum

products annually refined in the United States. Foreign purchased petroleum products may double

DOD’s consumption.

The Defense Energy Support Center (DESC), under the command of the Defense Logistics

Agency (DLA), has the mission of purchasing fuel for all of DOD’s services and agencies, both in

the continental United States (CONUS) and outside (OCONUS). DESC’s origins date back to

World War II, when the Army-Navy Petroleum Board fell under the Department of the Interior.

Its mission transferred to the War Department in 1945 and its designation changed to the Joint

Army-Navy Purchasing Agency. In 1962, the agency became a part of the former Defense Supply

Agency, now known as the Defense Logistics Agency (DLA). Designated the Defense Fuel

Supply Center (DFSC) in 1964, it served as a single entity to purchase and manage the DOD’s

petroleum products and coal. In 1998, it was re-designated the Defense Energy Support Center

with an expanded new mission to manage a comprehensive portfolio of energy products.1

In practice, DESC typically awards fuel contracts based on the lowest cost to the point of

delivery, typically for lengths of one year. DESC’s fuel procurement categories include bulk

petroleum products (JP-8, JP-5, and diesel fuel), ships’ bunker fuel, into-plane (refueling at

commercial airports), and post-camp-and-station (PC&S).2 Although DOD may represent the

single largest consumer of petroleum products, its consumption primarily of JP-8, JP-5, and diesel

fuel aligns more closely with the narrower market for middle-distillate fuels.3

This report summarizes DOD’s fuel purchases over the current decade (FY2000 through

FY2008); and compares fuel spending to overall DOD spending. It also compares the prices that

DOD pays for fuel to commercially equivalent fuel, and the quantities of DOD fuel purchases to

the net production of U.S. refined petroleum products. To place DOD’s fuel requirement in a

larger perspective, the report discusses refining and refineries supplying DOD’s jet fuel, and

DESC’s fuel procurement practices. The report concludes by discussing recent legislation and

policies that affect fuel procurement.

In the past, when crude oil and refined petroleum prices were high, Congress has looked at

DOD’s fuel demand as a means of stimulating private sector interest in producing alternative

fuels. Recent legislation directs DOD to consider using alternative fuels to meet its needs, and to

stimulate commercial interest in supplying the needs. Recent high fuel prices did stimulate DOD

and private interest in producing alternative fuels from coal and oil shale, though no project has

yet reached commercial operation. Legislation ensuring that federal agencies do not spend

taxpayer dollars on new fuel sources that will exacerbate global warming now counters earlier

policy objectives. Proposed rules that mandate greenhouse gas emission reporting may minimally

affect refineries. Recently introduced legislation that would cap greenhouse gas emissions is

See http://www.desc.dla.mil/DCM/DCMPage.asp? LinkID=DESCHISTORY.

See Appendix for definition of terms and description of fuels.

The complete product categories include avgas, distillates & diesel, gasohol, JP-4, JAB, JAA, JA1, JP-5, JP-8, lube

oils, mogas, and bunker fuel.

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Department of Defense Fuel Spending, Supply, Acquisition, and Policy

likely to affect some refinery operations, if not the refining industry’s responsiveness to DOD’s

fuel requirements.

Fuel Purchases

DOD’s fuel consumption varies from year to year in response to changes in mission and the

tempo of operations. The majority of DESC’s bulk fuel purchases are for JP-8 jet fuel, which has

ranged from 60 to 74 million barrels annually over the past decade (the equivalent of 165,000 to

200,000 barrels per day). The Air Force and the Army represent the primary consumers of JP-8

fuel. The Navy consumes JP-5 jet fuel. All services to varying degrees consume diesel fuel.

DESC’s total fuel purchases peaked at 145.1 million barrels in FY2003, when U.S. forces invaded

Iraq. JP-8 purchases peaked in FY2004 and have since been declining (as discussed further

below). In FY2000, JP-8 represented almost 60% of overall DESC’s overall purchases and by

FY2008 only 46%.

Overall DESC fuel expenditures grew from roughly $3.6 billion in FY2000 to nearly $18 billion

by FY2008—a nearly 500% increase. Actual volumes purchased had only increased by 30% over

the same time. DESC petroleum product purchases, summarized by volume and total cost, appear

in Table 1.

Table 1. DESC Fuel Product Purchased by Category

(Million Barrels per Year)

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

JP-8

61.7

63.4

73.5

72.2

74.7

71.4

71.3

68.2

62.5

JP-5

15.4

18.6

20.6

17.9

16.1

12.8

14.4

13.6

12.1

Alt. Jet

0.1

0.2

8.7

11.3

5.4

9.3

15.6

19.3

23.1

Jet total

77.2

82.2

102.8

101.4

96.2

93.5

101.3

101.1

97.7

Diesel

15.5

20.8

21.6

25.2

21.0

21.2

22.1

22.8

24.5

Other

11.4

8.0

10.2

18.5

27.6

16.0

Total

104.1

111.0

134.6

145.1

144.8

130.7

135.9

136.1

134.9

$ Million

3,604

4,178

4,143

5,564

6,948

8,843

11,504

11,465

17,944

12.5

12.2

12.7

Source: DESC, Fact Books (FY1997 through FY2007), http://www.desc.dla.mil/DCM/DCMPage.asp?PageID=721;

Notes:. Alt. Jet (alternative jet fuels) includes Jet A, Jet A-1, Jet B, and JP-4; see glossary for description. Other

includes lube oils, mogas and residuals), into-plane, post-camp-and-station, and ship’s bunker.

DESC’s purchases, however, do not necessarily correspond with DOD’s actual consumption.

DESC may draw fuel down from storage to supplement demand and may replenish fuel stores

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Department of Defense Fuel Spending, Supply, Acquisition, and Policy

with purchases. DOD also maintains a fuel “war reserve” that it may draw down in

contingencies.4

While DOD’s full consumption began leveling off after the Iraq war, fuel costs and average fuel

prices continued increasing; in part, from increasing crude oil prices (which spiked to nearly $140

per barrel in the summer of 2008) and, in part, from increasing refining margins (discussed

below). The average cost of all petroleum products purchased rose from $34.62 per barrel in

FY2000 to over $133 per barrel in FY2008; an increase of nearly 370% (see Figure 1).

Figure 1. Average Cost of All DESC Purchased Petroleum Products

$140.00

$120.00

$100.00

$80.00

$60.00

$40.00

$20.00

$0.00

FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008

$/barrel $34.62

$37.64

$30.78

$38.36

$47.98

$67.66

$84.24

$84.26 $133.04

Source: DESC, Fact Books (FY1997 through FY2007).

DOD Fuel Cost vs. Commercial Fuel Price

Earlier, JP-8 and JP-5 jet fuels held a comparative price advantage over their commercial

equivalent—Jet A fuel. With commercial aviation’s setback after September 11, 2001, and the

Iraq invasion in 2003, the military jet fuel price-advantages reversed. Jet and diesel fuel prices

appear in the graph of Figure 2 and the summary in Table 2. Note that as all fuel-prices

increased, the margin between refiners’ crude oil cost and refined product prices also increased;

from an average of 15¢/gallon in FY2000 to an average of 91¢/gallon by FY2008.

DOD did respond when refiners offered commercial jet fuel at lower prices than military

specification fuel. As shown in Table 1, DESC offset decreasing JP-8 purchases with increasing

purchases of alternate jet fuels (commercial aviation specification fuels that can substitute for

military specification). Diesel fuel purchases also picked up.

War reserve stocks are classified information.

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Figure 2. DOD Fuel Costs vs. Commercial and Crude Oil Price

($ per gallon)

$/gallon

$3.50

$3.00

JP-8

$2.50

JP-5

$2.00

Diesel

$1.50

Jet Alternate

$1.00

Retail Kero-Jet

$0.50

Refiner Crude Oil

Cost

$0.00

00 01 02 03 04 05 06 07 08

FY FY FY FY FY FY FY FY FY

Source: DESC Fact Book and U.S. EIA U.S. Crude Oil Composite Acquisition Cost by Refiners ($/Bbl),

http://tonto.eia.doe.gov/dnav/pet/hist/r0000_3a.htm.

Notes: JP-8, JP-5, and diesel represent DOD costs; Jet Alternate includes JP-4, JAA, JAA-1 and JAB. Retail Kerojet represents commercial aviation jet; and Refiner Crude Oil Costs oil represents the average annual cost of

acquisition by U.S. refiners. See Table 2 for cost breakout.

Table 2. DOD Fuels Costs vs. Crude Oil Costs

($ per gallon)

2000

2001

2002

2003

2004

2005

2006

2007

2008

US Jet Retail Sales

0.81

0.88

0.67

0.85

1.07

1.60

2.03

1.99

3.16

JP-8

0.85

0.89

0.70

0.88

1.09

1.66

2.06

2.05

3.33

JP-5

0.82

0.88

0.69

0.87

1.07

1.60

2.05

2.00

3.13

Diesel

0.74

0.85

0.68

0.85

1.04

1.57

1.96

2.00

3.17

Jet Alternates

1.31

1.27

0.95

1.11

1.03

1.33

1.71

1.62

2.59

Average Cost

0.82

0.90

0.73

0.91

1.11

1.61

2.02

2.01

3.14

Refining Margin

0.15

0.35

0.16

0.23

0.41

0.58

0.39

0.91

Refiner Crude Cost

0.64

0.61

0.52

0.67

0.80

1.12

1.43

1.44

2.42

$/bbl

26.70

25.80

21.98

28.01

33.65

47.21

59.95

60.62

101.52

Source: Defense Energy Support Service, Fact Book (2000 – 2008). Energy Information Administration—

Petroleum Navigator, Monthly U.S. Crude Oil Composite Acquisition Cost by Refiners, and Monthly U.S. Kerosene-type Jet

Fuel Retail Sales by Refiners.

Notes: Jet Retail represents the retail sales of jet fuel by U.S. refiners averaged over the fiscal years. Prices are

normally reported in cents per gallon, but have been converted to dollars per gallon.

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Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Refiner Crude Oil Costs represent the refiners cost for acquiring crude oil averaged over the fiscal year. Crude

oil costs are typically reported in terms of $/barrel, but for the purpose of this table, the cost has been

converted to $/gallon. One barrel (bbl) is equivalent to 42 gallons (gal).

DESC Fuel Cost vs. DOD Outlays

Outlays represent cash payments made to liquidate the government’s obligations in a fiscal year.

The obligations may be incurred over a number of years as there is a time lag between budgeting

funds (congressional appropriation), signing contracts and placing orders (obligations), receiving

goods or services and making payments (liquidating obligations). Outlays, as used here, represent

DOD’s actual spending, rather than its authority to incur legally binding obligations or budget

authority.

From FY2000 through FY2007, total defense outlays increased 200% (in current dollars), while

Operation and Maintenance (O&M) spending increased by 231% (see Table 3). Fuel costs

increased 497% during the same period, owing in large part to rapidly escalating crude oil prices.

Stated in other terms, fuel costs represented 1.2% of DOD’s spending in FY2000, and more than

doubled to 3% by FY2008.

Table 3. DESC Fuel Costs vs. DOD Budget Authority and Outlay

($ billion)

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

290.5

309.9

332.1

437.8

471.0

483.9

593.7

602.2

673.5

Outlay

294.5

308.5

332.1

387.3

436.5

474.2

499.3

529.1

594.6

O&M

105.9

112.0

114.7

151.4

174.0

188.1

203.8

216.6

244.8

Fuel Cost

3.6

4.2

4,1

5.6

6.8

8.8

11.5

17.9

% Outlay

1.2

1.4

1.2

1.4

1.5

1.9

2.3

2.2

3.0

% O&M

3.4

3.6

3.7

4.5

4.7

5.6

5.3

7.3

Source: National Defense Budget Estimates (Green Book) 2001-2010, http://www.defenselink.mil/comptroller,

and Defense Energy Support Service, Fact Book (2000-2007).

Notes: BA—Budget Authority in Current Dollars. O&M—O&M Outlay.

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Refining, Suppliers, and the Crude Oil Supply

Crude Oil Supply

The U.S. produces roughly one-third of the crude oil it consumes annually with the balance

supplied by Canada, Saudi Arabia, Mexico, Venezuela, Nigeria, and other smaller producers

(Figure 3). A range of crude oils assays appears in Table 4. In the past, when U.S. crude oil

production was higher than today, refineries could depend on steady supplies of light sweet (low

sulfur) crude oil. The benchmark for this crude oil grade, West Texas Intermediate (WTI), is the

reference for pricing of U.S. domestic crudes, as well as oil imports into the United States. With

the diminishing supply of sweet crudes, refineries have increasingly turned to heavier sour

crudes.

Figure 3. Crude Oil Supply 2007

Imported and U.S. Produced Crude Oil

Canada, 12.51%

United States,

33.55%

Saudi Arabia,

9.59%

Mexico, 9.33%

Venezuela,

7.61%

Other, 20.25%

Nigeria, 7.18%

Source: Energy Information Administration, U.S. Crude Oil Imports. http://tonto.eia.doe.gov/

dnav/pet/pet_move_impcus_a2_nus_epc0_im0_mbbl_a.htm.

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Table 4. Crude Oil Assays

Crude Oil

West Texas Intermediate Crude Oil (a)

° API

%Sulfur

PPM Sulfur

0.30

3,000

29.5 – 29

1.10

11,000

Strategic Petroleum Reserve sweet/sour (b)

40 – 30

0.5 – 2.0

5,000 – 20,000

NYMEX Deliverable Grade Sweet Crude Oil (c)

42 – 37

<0.42

4,200

37.7 – 37.5

0.42 – 0.56

4,200 – 5,600

38.7

0.19

1,900

Saudi Arabia Arab Extra Light/ Heavy (d)

37.2 – 27.4

1.15 – 2.80

11,500 – 28,000

Mexico Maya/Olmeca (d)

39.8 – 22.2

0.80 – 3.30

8,000 – 33,000

Venezuela Tia Juana Light/Heavy (d)

31.8 – 18.2

1.16 – 2.24

11,600 – 22,400

33.8

0.30

3,000

Alaska North Slope Crude Oil (a)

Canadian Sweet/Sour (d)

Canadian Alberta Syncrude (d)

Nigeria Bonny Light (c)

Source: (a) Platt’s Oil Guide to Specifications, 1999. (b) Strategic Petroleum Reserve Crude Oil Assays

http://www.spr.doe.gov/reports/Crude_Oil_Assays.htm (c) NYMEX, Exchange Rulebook, Light “Sweet” Crude Oil

Futures Contract. http://www.nymex.com/rule_main.aspx?pg=63 (d) HPI Consultants

http://www.hpiconsultants.com/index.html.

Notes: API – the American Petroleum Institute inverted gravity scale is used to express the ‘lightness’ or

‘heaviness’ of crude oils: light - greater than 30º; medium - 22º to 30º; heavy - less than 22º; and extra heavy below 10º. Formula: (141.5 ÷ relative density of the crude [at 15.5°C or 60°F]) - 131.5.

Refining

Crude oil contains natural components in the

Figure 4. Petroleum Products Boiling

boiling range of gasoline, kerosene/jet fuel

Range

and diesel fuel as shown in Figure 4. These

products separate out in a refinery’s

atmospheric distillation tower. The term

“straight-run” applies to the product streams

that condense during this initial refining

process. Many refineries now process the

residuum that remains after atmospheric

distillation into gasoline and middle distillate

range products using heat and pressure,

hydrogen, and catalysts (hydrocracking and

catalytic cracking in refining terms).

Depending on their complexity, refineries

Source: CRS

may also produce kerosene/jet fuel and diesel

fuel in this manner. As would be expected, specifications for jet fuel, particularly military grade,

are more rigorous than for kerosene.5

ASTM test method MIL-DTL-83133 is applied JP-8.

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Generally, refineries are set up to run specific grades of crude oil, for example light sweet or

heavy sour. Light sweet crude is particularly desirable as a feedstock for gasoline refining

because its lighter-weight hydrocarbons make it easier to refine. Heavier crude oils require more

complex processing than light crudes, and sour crudes require a desulfurization.

Refineries may be set up as:

•

Topping refineries separate crude oil into its constituent petroleum products

simply by distillation, also referred to as atmospheric distillation. A topping

refinery produces naphtha but no gasoline.

•

Hydroskimming refineries are equipped with atmospheric distillation, naphtha

reforming and necessary processes to treat for sulfur. More complex than a

topping refinery, hydroskimmers run light sweet crude and produce gasoline.

•

Cracking refineries add vacuum distillation and catalytic cracking to run light

sour crude to produce light and middle distillates;

•

Coking refineries are high conversion refineries that add coking/resid destruction

(delayed coking process) to run medium/sour crude oil.

A refinery’s atmospheric distillation capacity sets the limit of its crude oil processing (usually

expressed as barrels per calendar day or barrels per stream day). Catalytic cracking, coking, and

other conversion units, referred to as secondary processing units, add to a refinery’s complexity

and can actually increase the volume of its output. Relative size, however, can be measured using

refinery complexity—a concept developed by W.L. Nelson in the 1960s. The Nelson Complexity

Index rates the proportion of secondary processes to primary distillation (topping) capacity.6 The

index varies from about 2 for hydroskimming refineries to about 5 for cracking refineries, and

over 9 for coking refineries.7 While the average index for U.S. refineries is 10, only 59 have

coking capacity.

A typical refinery yields a limited supply of jet and diesel fuel yield depending on the type of

crude oil processed. Gulf Coast (Texas and Louisiana) refineries with an average complexity of

12 to 13 may yield up to 8% jet fuel, and over 30% diesel as shown in Figure 5.8

The index was developed by Wilbur L. Nelson in 1960 to originally quantify the relative costs of the components that

constitute the refinery. Nelson assigned a factor of one to the primary distillation unit. All other units are rated in terms

of their costs relative to the primary distillation unit also known as the atmospheric distillation unit.

Reliance Industries Limited, Types of Refinery & Nelson’s Complexity Index, http://www.ril.com/html/business/

types_refinery.html.

Complexity calculated by CRS based on NCI data published by the Oil and Gas Journal.

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Figure 5.Yields of Typical Gulf Coast Refineries

Percent (%)

100

Percent

48.1

39.9

36.8

8.2

6.7

9.7

Gasoline

44.9

8.1

7.8

Diesel

Fuel Oil

24.7

30.9

Kerosene/Jet

41.6

39.6

23.7

9.8

West Texas

Intermediate

4.5

Arab Light

Arab Heavy

Nigerian Bonny

Light

Source: Data used from Energy Intelligence, The International Crude Oil Refining Handbook, 2007

http://www.energyintel.com

Notes: Winter yields shown.

Sulfur Regulations

Changes in crude oil supplies have led some refineries to upgrade their processes (increasing their

complexity) to handle heavier sour crude oils. At the same time, the Environmental Protection

Agency (EPA) has taken action to reduce the sulfur content of diesel fuel. By the end of 2010, the

sulfur content of all highway-use diesel fuel imported or produced in the United States will be

limited to 15 parts-per-million (ppm) or 0.0015%; a fuel now termed “ultra-low sulfur diesel”

(ULSD).9 The EPA regulations require measuring the sulfur content at the retail outlet, not the

refinery. Petroleum product pipelines transport a variety of fuels; for example, a slug of gasoline

followed by a slug of diesel fuel. To limit the additional sulfur picked up during pipeline transit,

refiners are faced with producing even lower sulfur diesel fuel, or disposing of contaminated

“transmix”—the interface between the slug of diesel and a higher sulfur-content product that

preceded the diesel in the pipeline—by reprocessing.

In the late 1980s, DOD adopted the “single battlefield fuel” concept that envisioned using the

same fuel for aircraft and ground equipment operating within a theater.10 DOD has steadily

substituted JP-8 for diesel fuel in operating land-based equipment tactical vehicles and

equipment. (This concept did not apply to naval operations or include carrier-based aircraft.) The

quality of diesel fuel, particularly the sulfur content, varies significantly in other parts of the

world. To minimize the length of the fuel supply chain to a theater of operation, the Army must

rely on regionally supplied diesel fuel or JP-8, which can expose vehicles to fuel with elevated

sulfur levels. The U.S Army has adopted the American Society of Testing and Materials (ASTM)

standard MIL-DTL-83133E for JP-8 that limits the maximum allowable sulfur content to 3,000

ppm, though a content of 140 ppm is typical. The sulfur content of most kerosene is currently 400

40 C.F.R. § 80.510.

Office of the Secretary of Defense, Directive 4140.43 Fuel Standardization, 1988; supercede by Directive 4140.25,

DOD Management Policy for Energy Commodities and Related Services, 2004.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

ppm. EPA’s “Guidelines for National Security Exemptions of Motor Vehicle Engines – Guidelines

for Tactical Vehicle Engines” recognizes that tactical vehicles may need to operate on JP-8 or JP5 fuel while in the United States to facilitate their readiness. EPA has not indicated that it will act

on reducing the sulfur content of jet fuel.

Greenhouse Gas Regulations

In 2007, the Unites States Supreme Court ruled that EPA has the authority under the Clean Air

Act to regulate carbon dioxide (CO2) emissions from automobiles, and directed the EPA to

conduct a thorough scientific review.11 After the ordered review, EPA issued a proposed finding,

in April 2009, that greenhouse gases contribute to air pollution that may endanger public health or

welfare.12 Though the finding pertained to automobile emissions, it has wide ranging

implications. EPA recently proposed a Mandatory Reporting of Greenhouse Gases (GHGs) rule

that would require petroleum refineries (among other industrial facilities) to report emissions

from refining processes and all other sources located at the facility as defined in the rule.13

Petroleum refineries emit approximately 205 million metric tons CO2 annually, which (according

to the rule) represents approximately 3% of the U.S. GHG emissions. The cost of complying with

the proposed could be minimal. However, the rule establishes the basis for future legislation and

regulations that could cap GHG emissions from refineries as well as other industrial sources.

Recently introduced bills (for example H.R. 2454 ─ The American Clean Energy and Security

Act of 2009, which the House passed June 26, 2009) that would amend the Clean Air Act to

establish a cap-and-trade system designed to reduce greenhouse gas emissions would cap

emissions from refineries and allow trading of emissions permits (“allowances”). Over time, H.R.

2454’s provisions would reduce the cap to 83%, forcing industries to reduce emissions by that

amount or purchase allowances or offsets from others who would have reduced emissions more

than required or who are not covered by the cap.

U.S. Refiners Supplying DOD Fuel

Currently, 142 refineries operate in the United States. The Energy Information Administration

(EIA) reports their aggregate kerosene and jet fuel production (due to their overlapping boiling

ranges) but does not break out production statistics by refinery.14 DESC does report refiners and

suppliers that it awards contracts under its fuel solicitations. Between FY2003 and FY2008,

DESC reported that its 4 top domestic suppliers included Shell, Valero Marketing and Supply

Company, ExxonMobil, and BP Corporation (Table 5).

Massachusetts et al. v. Environmental Protection Agency, 549 U.S. 497 (Supreme Court of the United States, April

2, 2007).

The Proposed Endangerment and Cause or Contribute Findings for Greenhouse Gases under the Clean Air Act was

signed on April 17, 2009. On April 24, 2009, the proposed rule was published in the Federal Register

(www.regulations.gov) under Docket ID No. EPA-HQ-OAR-2009-0171.

Environmental Protection Agency, “Mandatory Reporting of Greenhouse Gases: Proposed Rule,” 74 Federal

EIA, http://www.doe.eia.gov.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Table 5. Top U.S. Fuel Suppliers to DOD FY2003 - FY2008

Supplier

FY2003

$ million

FY2005

Supplier

FY2006

$ million

1,190

9.2

Exxon Mobil

729

13.6

Shell

538

10.0

Exxon Mobil

1,178

9.1

442

8.2

Shell

1,151

8.9

Valero

FY2004

314

5.8

Valero

661

5.1

2,023

37.6

Refinery

Associates

576

4.4

4,756

36.7

Shell

1,068

17.2

602

10.0

Shell

2,108

17.2

Valero

334

5.5

Valero

1,027

8.4

Exxon Mobil

275

4.5

Exxon Mobil

1,019

8.3

2,279

37.2

BP Corporation

961

7.8

5,115

41.7

1,604

14.9

Exxon Mobil

1,024

9.5

Shell

1,715

12.1

Shell

1,004

9.3

1,523

10.7

564

5.2

Valero

1,044

7.4

4,196

38.9

Exxon Mobil

836

5.9

5,118

36.1

Valero

FY2007

FY2008

Source: DESC Fact Book (2003 – 2008).

Notes: U.S Suppliers shown.

Combined, the companies in Table 5 operate 31 refineries in the United States (shown in Table

6), and represent nearly 6 million barrels per day of crude capacity. Not all may supply jet fuel to

DOD, however. This suite of refineries averages 10 as rated by the Nelson Complexity Index.

Two-thirds have the coking capacity needed to refine medium sour crude.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Table 6. U.S. Refineries Operated by Top Suppliers

Crude

Capacity Nelson

barrels/d Complex

ity Index Company

Location

BP PLC

Ferndale

220,400

Valero Energy

Corp.

Valero Energy

Corp.

Three

Rivers

96,000

Ardmore

87,877

399,000

Company

Location

Valero Energy Corp.

Krotz

Springs

83,100

BP PLC

Kuparuk

14,500

Valero Energy Corp.

Denver

28,000

Valero Energy Corp.

Corpus

Christi

TX 205,000

BP PLC

Whiting

Valero Energy Corp.

Norco

186,000

ExxonMobil

Torrance

Shell Chemical Co.

St. Rose

55,000

ExxonMobil

Baytown

BP PLC

Prudhoe

Bay

15,000

ExxonMobil

BP PLC

Toledo

147,250

Shell Oil Products U.S. Anacortes

148,600

Valero Energy Corp.

Paulsboro

ExxonMobil

Baton

Rouge

Shell Deer Park

Refining Co.

Crude

Capacity Nelson

barrels/d Complexi

ty Index

149,500

TX 563,000

Chalmett

188,000

ExxonMobil

Billings

60,000

Valero Energy

Corp.

Sunray

TX 166,660

166,000

ExxonMobil

Beaumont TX 348,500

501,000

Valero Energy

Corp.

Benicia

Deer Park

TX 333,700

ExxonMobil

Joliet

238,000

BP PLC

Carson

247,000

BP PLC

Texas City TX 446,500

Valero Energy Corp.

Texas City TX 225,000

139,500

Valero Energy

Wilmingt C

80,000

Corp.

Shell Oil Products

Martinez

157,600

U.S.

Shell Oil Products Wilmingt C

100,000

U.S.

Valero Energy

Houston TX 90,000

Corp.

Total/

Average

2,846,037

11.75

Source: Oil & Gas Journal. December 19, 2005.

Between 2000 and 2009, the number of refineries operating in the United States declined from

155 to 141.15 However, the atmospheric crude oil distillation capacity increased from 17.8 million

to 18.6 million barrels per stream day (bpsd).16 The 1 million bpsd increase is due in part to

U.S. DOE Energy Information Administration, Petroleum Navigator, Number and Capacity of Petroleum Refineries,

http://tonto.eia.doe.gov/dnav/pet/pet_pnp_cap1_dcu_nus_a.htm.

Barrels per stream day: The maximum number of barrels of input that a distillation facility can process within a 24hour period when running at full capacity under optimal crude and product slate conditions with no allowance for

downtime.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

increased diesel fuel capacity (now 3.5 million bpd). The downstream charge capacity for

kerosene/jet fuel has averaged slightly over 1 million barrels per stream day.17 The median

capacity of all currently operating refineries is roughly 80,000 bpd, and the 70 some refineries

above the median capacity make up 85% of overall U.S. refining capacity.

Refinery Jet Fuel Yield and Supply

A typical refinery yields a limited supply of jet and diesel fuel depending on the type of crude oil

processed. Gulf Coast refineries may yield up to 8% jet fuel, and over 30% diesel (see Figure 5

above).

U.S. refineries produce roughly ten times more commercial jet fuel than military specification jet

fuel, which has ranged from less than 50 to over 60 million barrels annually since 2000 (see

Table 7).

Table 7. Military Use vs. Commercial Use Jet Fuel, and Total U.S. Refined Products

Million Barrels per Year

2000

2001

2002

2003

2004

2005

2006

2007

2008

Military Jet

55.2

62.7

58.1

52.7

55.8

48.8

49.1

53.8

Commercial

532.7

495.5

489.8

485.2

513.5

508.4

491.8

479.4

492.6

Total Jet

587.9

557.5

552.5

543.3

566.2

564.2

540.6

528.5

546.4

All Refined

Products

6,310.9

6,309.0

6,304.6

6,382.8

6,510.8

6,497.0

6,560.9

6,567.9

6,641.3

Source: U.S. Department of Energy EIA Petroleum Navigator - U.S. Refinery Net Production,

http://tonto.eia.doe.gov/dnav/pet/pet_pnp_refp2_dc_nus_mbbl_a.htm.

Notes: Mil – Military kerosene Jet fuel; Com – commercial jet fuel; All US – all US refined petroleum products.

Restating the data of Table 7 in percentages, military jet fuel production ranges from 9% to 11%

of the U.S. net production of jet fuel, but makes up less than 1% of all U.S. refined petroleum

products (see Table 8).

Table 8. U.S. Refined Military Jet Fuel Percentage of U.S. Refined Jet Fuel

and All U.S. Refined Products

(%)

2000

2001

2002

2003

2004

2005

2006

2007

2008

Mil. Vs All Refined Jet Fuel

9.3%

11.2%

11.3%

10.7%

9.3%

9.9%

9.0%

9.3%

9.8%

Mil. Vs All Refined Products

0.9%

1.0%

0.9%

0.8%

0.9%

0.7%

0.8%

Source: Complied from Table 1 and Table 7.

Charge capacity: The input (feed) capacity of the refinery processing facilities.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

DESC’s worldwide jet fuel purchases have exceeded the U.S. refining industry’s jet fuel output in

recent years (see Table 9). In some years, U.S. refineries supplied less than 50% of DESC’s jet

fuel purchases. That is, the current capacity of U.S. refineries does not meet all of DOD’s demand

for military specification jet fuel. To make up the disparity, DESC has increased its purchase of

commercial jet fuels, such as Jet A, which it upgrades to military specification. More recently,

this strategy has reduced DESC’s spending on fuel, as commercial jet fuel has priced lower (see

retail kero-jet price curve in Figure 2).

Table 9. U.S. Refined Military Jet Fuel Vs. DESC Jet Fuel Purchases

(million barrels per year)

2000

2001

2002

2003

2004

2005

2006

2007

2008

US Refined Military Spec Jet Fuel

55.2

62.7

58.1

52.7

55.8

48.8

49.1

53.8

DESC Military Jet Fuel Purchase

77.2

82.2

102.8

101.4

96.2

93.5

101.3

101.1

97.7

US % of DESC

71.5%

76.3%

61.0%

57.3%

54.8%

59.7%

48.2%

48.6%

55.1%

Source: Compiled from Table 1 and Table 7.

Notes: “US % of DESC” represents the percentage of DESC jet fuel that the U.S. refineries supplies.

The lack of U.S. refining capacity does not necessarily compromise DOD’s fuel supply. A lengthy

fuel supply chain that extends from the continental United States to forward operating areas (Iraq

or Afghanistan, for example) is not desirable. Logistics demand that closer refineries supply the

fuel. DESC makes up the balance of its purchases through contracts with foreign refineries and

suppliers to support U.S. forces and installations outside the continental United States.

Fuel Acquisition

Originally, DOD’s authority to procure fuel extends from power originally granted to the Navy.

Under 10 U.S.C. § 7229 (Purchase of Fuel), “... the Secretary of the Navy may, in any manner he

considers proper, buy the kind of fuel that is best adapted to the purpose for which it is to be

used.”18

Section 7229 superseded 34 U.S.C. 580 “which had been interpreted as authorizing the Armed

Services Petroleum Purchasing Agency to negotiate contracts for the purchase of fuel, not only

when acting as a procuring activity for the Navy, but also when filling the consolidated fuel

requirements of the armed forces.” 19 However, DESC now relies on the general procurement

authority under 10 U.S.C. 2304 (Contract: competition requirement), since this gives DOD the

authority to buy almost any kind of supply or service.

Title 10—Armed Forces, Subtitle C—Navy and Marine Corps, Part IV—General Administration; Chapter 631—

Secretary of the Navy: Miscellaneous Powers and Duties.

Title 34 – Navy was repealed generally by an act of August 10, 1956, which revised and codified the statutory

provisions that related to the Army, Navy, Air Force, and Marine Corps, and enacted those provisions into law as Title

10, Armed Forces. 70 Stat. 1126. Public Law 1028 Chapter 1041, 70A Stat. 1.

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Department of Defense Fuel Spending, Supply, Acquisition, and Policy

DESC awards contracts and purchases fuel in a one-step process under the Defense Working

Capital Fund (DWCF). It internally transfers the fuel to DOD customers, which it refers to as

“sales.” This operation permits the Department to take advantage of price breaks for large

quantity purchases, and in most years provides the DOD customer a stabilized price for all

products during that fiscal year.

Acquisition Regulations

The term “acquisition,” as defined by Title 41 (Public Contracts) U.S.C. Section 403, means the

process of acquiring, with appropriated funds, by contract for purchase or lease, property or

services that support the missions and goals of an executive agency. The term “procurement”

includes all stages of the process of acquiring property or services, beginning with the process for

determining a need for property or services and ending with contract completion and closeout.

Title 10 U.S.C. Chapter 137 – Procurement codifies general military laws governing the Armed

Forces acquisition process.

The primary document for federal agency acquisition regulations consists of the Federal

Acquisition Regulation (FAR), as promulgated in Title 48 Code of Federal Regulations (CFR) –

The Federal Acquisition Regulations System.20 The FAR System does not include internal agency

guidance, however. DOD has promulgated the Defense Acquisition Regulation System (DFARS)

in 48 CFR Parts 201 through 299.

Multiyear Contracting Authority

In practice, DESC has typically awarded one-year bulk-fuel contracts and multi-year direct

delivery fuel contracts. DESC uses fixed-price contracts with an economic price adjustment that

provides for upward and downward revision of the stated contract price upon the occurrence of

specified contingencies.21 Generally, these types of contracts use the clauses at FAR 52.216–2,

Economic Price Adjustment—Standard Supplies.22 DESC uses economic price adjustment

provisions in contracts when general economic factors make the estimation of future costs too

unpredictable, as is typically the case for refined petroleum products.23

DESC has determined supplies and related services are eligible for the multi-year contracting

provisions under FAR17.105-1(b) and DFARS 217.170(a) and 217.172(b). DESC adopted

contracting instructions for entering into multiyear contracts for bulk petroleum, ships’ bunker,

into-plane, and post-camp-and-station for the interim period of October 1, 2008, through

September 30, 2009.24 DOD and the military departments are authorized to enter initial five-year

contracts for storage, handling, or distribution of liquid fuels or natural gas under 10 U.S.C

P.L. 93-400 Office of Federal Procurement Policy Act of 1974 as amended by P.L. 96-83 Office of Federal

Procurement Policy Act Amendments of 1979. Federal Acquisition Regulations are available at http://farsite.hill.af.mil/

VFDFARA.HTM.

See 48 C.F.R. § 16.203—Fixed-price contracts with economic price adjustment, and 48 C.F.R. § 216.203-4—

Contract Clauses.

http://www.acqnet.gov/far/current/html/52_216.html#wp1114622

See DFARS PGI 216_2 – Fixed Price Contracts. http://farsite.hill.af.mil/reghtml/regs/far2afmcfars/fardfars/dfars/

PGI%20216_2.htm#TopOfPage

Contracting Instruction (CI): 08-12 Multiyear Determination and Findings. http://www/desc/dla/mil.

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Department of Defense Fuel Spending, Supply, Acquisition, and Policy

§2922. These contracts may contain options for up to three five-year renewals, but not for more

than a total of twenty years.

“Multiyear contract” means a contract for the purchase of supplies or services for more than one,

but not more than five, program years. A multiyear contract may provide that performance under

the contract during the second and subsequent years of the contract is contingent upon the

appropriation of funds, and (if it does so provide) may provide for a cancellation payment to the

contractor if Congress does not appropriate funds. The key difference between a multiyear

contract and a multiple year contract is that multiyear contracts buy more than one year’s

requirement (of a product or service) without establishing and having to exercise an option for

each program year after the first, whereas multiple year contracts have a term of more than one

year regardless of fiscal year funding.25

Multiyear contract authority for supplies derives from the general procurement statutes for

acquisition of property under 10 U.S.C. 2306b (Multiyear contracts: acquisition of property).

DOD agencies, as regulated under 48 CFR 17.172 (Multiyear Contract for Supplies), may enter

into multiyear contracts for supplies if the use of such contracts will promote national security.

DOD may enter into a multiyear contract for supplies if the contract will result in substantial

savings of the total estimated costs of carrying out the program through annual contracts (48 CFR

17.105-Uses). If Congress does not appropriate funds to support the succeeding years’

requirements, the agency must cancel the contract. Multiyear contracting is encouraged in order

to take advantage of lower costs, among other objectives under 48 CFR 17.105-2 (Objectives).

A multiyear contract for supplies, in addition to the conditions listed in FAR 17.105-1(b), can be

entered into if the contract will promote the national security of the United States (10 U.S.C. §

2306b (a) (6)) and promulgated in 48 CFR 217.172 - Multiyear contracts for supplies). The

multiyear contract cannot exceed $500 million (when entered into or when extended) until the

Secretary of Defense identifies the contract and any extension in a report submitted to the

congressional defense committees.

Acquisition of Alternative Fuels

DOD is authorized to procure fuel derived from coal, oil shale, and tar sands under 10 U.S.C. §

2922d. This also includes a direct authority for multi-year contracts. Contracts for procurement of

these fuels “may be for one or more years at the election of the Secretary of Defense.”

The Secretary of Defense has broad waiver authority over acquisition of alternative fuels. If the

Secretary determines that market conditions will adversely affect DOD’s acquisition for a certain

defined fuel source, the Secretary may waive any provision of law prescribing the formation of

contracts, prescribing terms and conditions to be included in contracts, or regulating the

performance of contracts. The term “defined fuel source” means petroleum (which includes

natural or synthetic crude, blends of natural or synthetic crude, and products refined or derived

from natural or synthetic crude or from such blends), natural gas, coal, and coke. The five-year

limit on multi-year contracts would be a “term and condition” which could be waived upon the

requisite finding of the Secretary. DESC has not determined whether it could or would want to

See FAR Subpart 22.10—Service Contract Act of 1965, as Amended.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

waive statutory limits on multiyear contracts, as it is not clear to DESC that either DDO or

Congress would agree with exercising the waiver authority for this purpose.26 DESC has not

wanted to take the chance of jeopardizing the delegation or losing the sales authority granted

under 10 U.S.C. § 2922e by taking this position.

Fully Burdened Cost of Fuel

DESC bases contract delivery price on the “lowest laid down cost” to the government. A typical

delivery point, a Defense Fuel Supply Point (government owned or leased tank farms),

redistributes fuel to bases and installations. DESC levels the price of fuel for all DOD’s

“customers” and includes a surcharge for its operating costs. While DESC’s contract may specify

the final destination, an additional cost may be incurred by the operational command that

tactically delivers the fuel forward ─ for example, air-to-air refueling, underway replenishment,

or ground transport. In the past, DOD had not factored these hidden costs into fuel costs.

The Duncan Hunter National Defense Authorization Act for FY2009 (P.L. 110-417) now requires

that analyses and force planning processes consider the requirements for, and vulnerability of,

fuel logistics.27 By making fuel logistics part of the acquisition processes, new military

capabilities must take a life-cycle cost analysis into account that includes the fully burdened cost

of fuel. The act also directs the appointment of a director responsible for the oversight of energy

required for training, moving, and sustaining military forces and weapons platforms for military

operations.28

Policy Considerations

Over the current decade, which saw an unprecedented spike in crude oil prices, DOD experienced

a 500% increase in the cost of fuel cost (dollars per barrel). The concern over declining

worldwide crude oil production had preceded rising fuel costs also for several years. In 2006, due

to increasing fuel costs and military operations in Iraq and Afghanistan, the Air Force had to

reduce funding available for flying hours used to train Air Combat Command aircrews.29

Fuel costs have represented as much as 3% of DOD’s spending and over 7% of the Operation and

Maintenance budget in the past decade. In comparison, the airline industry’s major operating

costs are fuel. However, the airline industry has the option during periods of high fuel cost of

passing the costs on to customers, adjusting flight schedules, withholding stock dividends, or

even declaring insolvency. Unlike the airlines, DOD’s only recourse has been to request

supplemental appropriations to pay for the increased costs and supplies. For example, DOD

identified $0.5 billion in the FY2007 Emergency Supplemental Request for increases in baseline

fuel costs resulting from higher market costs in the first half of FY2007.30 DOD has looked at

Personal communication with Dianne M. Smith-Neff, Defense Logistics Agency, July 7, 2009.

Section 332. Consideration of Fuel Logistics Support Requirements in Planning, Requirements Development, And

Acquisition Processes.

Section 902. Director of Operational Energy Plans and Programs.

Tech. Sgt. Russel Wicke, “Rising Fuel costs tighten Air Force belt,” Air Force Link, September 9, 2006,

http://www.af.mil/news/story.asp?id=123026679.

Office of the Secretary of Defense, Operation and Maintenance Overview Fiscal year (FY) 2008 Budget Estimates,

February 2007, p. 196, http://www.defenselink.mil/comptroller/Docs/fy2008_OandM_overview.pdf.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

several options to limit its vulnerability to fuel price swings and supply shortages. These include

“fuel hedging,” multi-year contracting, and alternate fuels. In particular, increasing purchases of

more widely available commercial Jet A fuel have not only reduced DOD’s fuel costs but have

expanded the range of supplies ─ an arguable goal for an alternative fuel.

DESC’s “business model” provides the flexibility needed to meet changing operational

requirements from year-to-year. As noted above, DESC uses fixed-price contracts that include an

economic price adjustment clause that provides for upward and downward price revisions. DESC

has designed this contract provision to take advantage of swings in fuel prices, which ultimately

reflect crude oil prices. If prices decline, DESC’s costs decline. If prices rise, the economic clause

adjusts the price that DESC would pay to the going market rate. This limits DESC’s risk in

holding contracts for fuel priced above the going market rate, but does not hold down costs

during rapidly escalating prices. (DESC will pay higher prices, but look for the best offer.)

A practice used in the airline industry makes use of various “hedging” strategies to minimize the

risk of future jet fuel price increases. A simple hedge involves buying “futures” contracts to lock

in prices. For example, when crude oil prices peaked at nearly $147 per barrel in the summer of

2008, Southwest Airlines reportedly had managed earlier to hedge its fuel at $51/barrel.31 In 2004,

the Defense Business Board convened the Fuel Hedging Task Group to examine potential ways of

reducing DOD’s exposure to fuel price volatility by hedging in commercial markets.32 Although

the Board Task Group concluded that DOD could feasibly hedge its fuel purchases, it gave

broader support to engaging in “no-market” hedging through the Department of the Interior’s

Mineral Management Service. During crude oil price spikes, additional Interior Department oil

could apply lease revenues to offset increasing DOD fuel costs.33 The Group concluded that DOD

could request that the Office of Management and Budget (OMB) seek legislative authority to

transfer funds from Interior to Defense, or vice versa; depending on which Department benefits

from unanticipated price changes. However, Interior derives the bulk of its revenues from Outer

Continental Shelf (OCS) leases, and Congress has already statutorily allocated those revenues

among various government accounts, including coastal states. Furthermore, OCS lessees pay

royalties-in-kind, in the form of oil delivered to the Strategic Petroleum Reserve (SPR).34

Congress created the SPR as a response to the 1970s Arab oil embargo to prevent a reoccurrence

of supply disruptions. When filled to its 727 million barrel capacity, the SPR represents roughly

70 days of imported supply. A drawdown of the SPR under the Energy Policy and Conservation

Act (EPCA – P.L. 94-163) can take the form of a sale to the highest bidder (42 U.S.C. § 6241), or

an exchange (the company receiving the oil must later replace it with a comparably valued

volume). During the opening days of the 1991 Persian Gulf War, President George H.W. Bush’s

drawdown authorization precipitated a rapid crude oil price decline.

Dan Reed, “Can fuel hedges keep Southwest in the money?,” USA Today, July 7, 2008. http://www.usatoday.com/

money/industries/travel/2008-07-23-southwest-jet-fuel_N.htm.

Fuel Hedging Task Group, Recommendations related to the practical use of fuel hedging for the Department of

Defense, Defense Business Board, March 1, 2004, http://www.defenselink.mil/dbb/pdf/FuelHedging-03-2004.pdf.

CRS Report RL33493, Outer Continental Shelf: Debate Over Oil and Gas Leasing and Revenue Sharing, by (name

redacted).

See CRS Report RL33341, The Strategic Petroleum Reserve: History, Perspectives, and Issues, by (name r

edacted).

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

The Government Accountability Office (GAO) reported that in 2006, 40% of the crude oil refined

in U.S. refineries was heavier than that stored in the SPR.35 Refineries that process heavy oil

cannot operate at normal capacity if they run lighter oils. The types of oil currently stored in the

SPR would not be fully compatible with 36 of the 74 refineries considered vulnerable to supply

disruptions. GAO cited a DOE estimate that U.S. refining throughput would decrease by 735,000

barrels per day (or 5%) if the 36 refineries had to use SPR oil—a substantial reduction in the

SPR’s effectiveness during an oil disruption, especially if the disruption involved heavy oil.

The SPR does not have a defined role in mitigating a DOD fuel supply disruption.36 Presumably,

a refinery under contract to supply DOD would have the option of bidding on a drawdown sale. A

typical refinery yields only 8% jet fuel on average. That is, for every gallon of jet fuel a refinery

yields, it also produces roughly 11.5 gallons of other petroleum products (gasoline, diesel). This

operational limitation on producing jet fuel limits the SPR’s role during a supply disruption, if the

only objective is supporting DOD’s requirement.

As a final recourse, DOD may look to an alternative or replacement for crude oil, as provided in

the 2005 Energy Policy Act. However, the Energy Independence and Security Act of 2007 (P.L.

110-140) prohibits federal agencies from procuring alternative or synthetic fuels, unless contract

provisions stipulate that life-cycle greenhouse gas emissions do not exceed equivalent

conventional fuel emissions produced from conventional petroleum sources.37 The provision was

included to ensure that federal agencies are not spending taxpayer dollars on new fuel sources

that will exacerbate global warming—a response to proposals under Air Force consideration to

develop coal-to-liquid (CTL) fuels.38 The Air Force has since abandoned plans to attract private

investment in a CTL fuel plant to supply Malmstrom Air Force Base, Montana, but DESC is

interested in pursuing a pilot program for synthetic fuels to support DOD JP-8 fuel requirements

in Alaska.39

Although crude oil prices have precipitously declined, as of late, the reoccurrence of crude oil

supply shortages and price spikes may be inevitable. Both policy and economics keep fossilbased alternatives out-of-reach for now. Confronted with the same realities facing all energy

consumers, DOD is shifting its thinking toward efficiency. DOD might better inform Congress by

reporting on the fully burdened cost of fuel for military operations and contingencies.

Another potential concern for Congress may be the refining sector’s lack of responsiveness to

DOD’s procurement announcements when periods of high petroleum prices make the demands of

commercial-sector more profitable. In response to proposed greenhouse gas emission caps,

refinery operators may question whether the value of emission credits outweighs the continued

operation of marginally profitable refineries. In the long term, Congress may be concerned

whether some operators may shut down their refineries and if such actions might reduce the

number of defense fuel suppliers.

U.S. Government Accountability Office, Strategic Petroleum Reserve - Options to Improve the Cost-Effectiveness of

Filling the Reserve, GAO-08-512T, February 26, 2008, p. 5, http://www.gao.gov/new.items/d08521t.pdf.

Under 42 U.S.C. § 6241 (g) Directive to carry out test drawdown and sale, the Secretary of Defense must determine

that a test drawdown would not impair national security.

Section 526 - Procurement and Acquisition of Alternative Fuels.

See Letter of March 17, 2008, from Chairman, House Committee on Oversight and Government Reform to

Chairman, Senate Committee on Energy and Natural Resources.

DESC News Release, February 2, 2009. https://www.desc.dla.mil/DCM/Files/

Registration%20Release_2009022009.pdf

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

For Further Reading

For background on alternative fuel sources, see

•

CRS Report RL34133, Fischer-Tropsch Fuels from Coal, Natural Gas, and

Biomass: Background and Policy.

•

CRS Report RL33359, Oil Shale: History, Incentives, and Policy.

For background information on greenhouse gas legislation and the cap-and-trade system, see

•

CRS Report R40643, Greenhouse Gas Legislation: Summary and Analysis of

H.R. 2454 as Passed by the House of Representative.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Appendix. Terms

Avgas (aviation gasoline) is a high octane fuel used in light aircraft powered by reciprocating

spark-ignition engines.

Crude Oil Classification

────────────

Sulfur

────────────

API

Sweet

Medium Sour

Sour

Gravity

0.0% - 0.5%

0.5% - 1.5%

1.5% -3.0+%

Mexico Olmeca

Arab Light

40º

Light

West Texas Interm.

33º

Medium

Bonny Medium

22º

Heavy

Venezuela Heavy

DFM (diesel fuel marine) has been used in all shipboard propulsion plants (diesel, gas turbine,

and steam-boiler) since 1975. Its NATO equivalent is F-76.

DF2 (No. 2 diesel fuel) is the primary fuel for ground mobility vehicles.

FSII stands for Fuel Systems Icing Inhibitor

FOB (free on board) is a trade term requiring the seller to deliver goods on board a vessel

designated by the buyer.40 The seller fulfills its obligations to deliver when the goods have passed

over the ship’s rail. When used in trade terms, the word “free” means the seller has an obligation

to deliver goods to a named place for transfer to a carrier. Contracts involving international

transportation often contain abbreviated trade terms that describe matters such as the time and

place of delivery and payment, when the risk of loss shifts from the seller to the buyer, as well as

who pays the costs of freight and insurance.

Jet A-1 (JA1) is a civilian-aviation kerosene-based turbine fuel adopted by international

commercial aviation. Its ASTM specification is D16555 (Jet A-1), and identified by NATO as F35. Jet A, normally available in the United States has the same flash point (100 ºF) as JET A-1 but

a higher freeze point.

Jet A (JA) is civilian-aviation kerosene type of jet fuel (similar to JA-1), produced to an ASTM

specification and normally only available in the United States. It has the same flash point as Jet

A-1 but a higher freeze point maximum (-40°C). It is supplied under ASTM D1655 (Jet A)

specification.

Jet B is a distillate covering the naphtha and kerosene fractions. It can be used as an alternative to

Jet A-1 but because it is more difficult to handle (higher flammability), there is only significant

demand in very cold climates where its better cold weather performance is important. It is

supplied in Canada under Canadian Specification is CAN/CGSB 3.23.

Forbes Investopedia, http://www.investopedia.com/terms/f/fob.asp.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

JP-4 (JP for “jet propellant”) is the military equivalent of Jet B with the addition of corrosion

inhibitor and anti-icing additives; it meets the requirements of the U.S. Military Specification

MIL-DTL-5624U Grade JP-4. (As of January 5, 2004, JP-4 and 5 meet the same U.S. Military

Specification). JP-4 also meets the requirements of the British Specification DEF STAN 91-88

AVTAG/FSII (formerly DERD 2454). Its NATO Code is F-40.

JP-5 is a fuel developed for use in military aircraft stationed aboard aircraft carriers where the

risk of fire is a great concern, particularly in the confined spaces of the hanger deck. It is

kerosene-based, and has a relatively higher flash-point (140 ºF) than other aviation turbine fuels

(Jet A-1 and JP-8). Its specification is MIL-DTL-5624 U. Its NATO code is F-44. JP-5 is also

suitable for use as ship turbine fuel.

JP-8 is the military equivalent of Jet A-1 but with corrosion inhibitors and icing inhibitors. The

Air Force switched to JP-8 in 1996 out of concerns for safety and combat survivability. It is a less

flammable and a less hazardous fuel than the previously used naphtha-based JP-4. (The Alaska

Air Guard still relies on JP-4 for its cold-climate properties.) Though JP-8 contains less benzene

(a carcinogen) and less n-hexane (a neurotoxin) than JP-4, it has as stronger smell and is oily to

the touch, whereas JP-4 is more solvent-like. Its ASTM specification is MIL-DTL-83133, and is

identified by NATIO as F-34. JP-8+100 includes an additive that increases thermal stability. JP-8

has also been adopted for use in diesel-powered tactical ground vehicles.

Middle Distillate range fuels include kerosene, jet fuel, and diesel fuel.

Military installation means a base, camp, post, station, yard, center, or other activity under the

jurisdiction of the Secretary of a military department or, in the case of an activity in a foreign

country, under the operational control of the Secretary of a military department or the Secretary of

Defense (10 U.S.C. 2801(c)(2)).

Mogas (motor gasoline) is the primary fuel for non-tactical ground vehicles.

Multiyear contracting is a special contracting method to acquire known requirements in quantities

and total cost not over planned requirements for up to five years unless otherwise authorized by

statute, even though the total funds ultimately to be obligated may not be available at the time of

contract award (48 CFR 17.104 General) . This method may be used in sealed bidding or

contracting by negotiation. Agency funding of multiyear contracts must conform to OMB

Circulars A-11 (Preparation and Submission of Budget Estimates) and A-34 (Instructions on

Budget Execution).

Naphtha is a petroleum distillate with a boiling range between gasoline and heavier benzene. It is

used as a feedstock in gasoline production where it is catalytically reformed from a lower to a

higher octane product termed reformate.

Congressional Research Service

Department of Defense Fuel Spending, Supply, Acquisition, and Policy

Author Contact Information

(name redacted)

Specialist in Energy and Energy Infrastructure

Policy

#redacted#@crs.loc.gov, 7-....

Congressional Research Service

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